Thursday, May 07, 2009

Stakeholder Capitalism and Shareholder Capitalism

In commenting on my post on Chrysler, Steve Newton of Delaware Libertarian describes me as being "excited at the prospect of stakeholder capitalism at Chrysler."
I am sure there will those who see this as an advance in economic justice or social democracy, but the implication that no legally-entered contract is now safe from the government restructuring it in favor of some creditors but not following law and precedence is an important deviation away from the rule of law toward the rule of politicians without constraint.
This has set me to thinking about Obama’s activist approach to the economic crisis. What is the proper relationship between government and industry? Steve worries about the government’s use of "heavy-handed tactics to modify contracts retroactively in pragmatic pursuit of social, political, and ideological goals."

While I agree that it’s heavy-handed to push for a workout of existing obligations, I would add that it's done in business all the time. (Perhaps you've heard of Henry Kravis and Donald Trump.) I would add that Chrysler’s bondholders weren’t the only parties to see their stake diminished; the company’s workers have taken a pretty big hit as well. The difference with Chrysler is that the government has become a big investor in the company—and that’s new, at least in the U.S.

To be clear, I don’t have a preference for stakeholder capitalism. My preference, refined and reinforced by my business school training, is for robust shareholder capitalism. Shareholder capitalism is all too often an ideal observed more in the breach than in the observance, for instance when managers seek to bamboozle their investors, as happened with Enron, WorldCom and Bank of America. We may be in for an era of greater shareholder assertiveness,
as happened when BofA’s Ken Lewis was dropped as chairman at last week’s annual meeting.

I also learned that corporate governance takes many forms, and that companies in Europe and Japan can compete with very different financial structures and board memberships. For instance, Volkswagen’s board includes government ministers and employee representatives, and the company seems to be doing just fine, having just posted a profit of 2.5 billion Euros.

One concern with stakeholder capitalism in the U.S. is that it is tried when a company is in deep distress, which means we may not see a clean test of whether the model works in America. Most boards are not inclined to tinker with their corporate governance when things are going well.

Capitalism is a powerful force for marshaling resources to create wealth, but we should recognize that it comes in different varieties. While I share a preference for shareholder capitalism, I have studied other models enough to conclude that they shouldn’t be dismissed outright.


Blogger Steven H. Newton said...

Interesting reply (which I didn't ignore, but just saw today). Apologies if I misstated your case via stakeholder capitalism, but it seemed to me in the original article that you were pretty happy about it.

Yes: renegotiation and even strong-arm tactics happen all the time in the private sector, and often in ways that are deleterious to the public good. That is, it seems to me, a case for more regulation to refine and support the law of contracts than a reason for the government to ape the practices of corporate thugs and "negotiate" a settlement that appears to violate its own bankruptcy regulations.

Government, I'd argue, should be in the business of regulating the playing field rather than participating, but then I admit I'm one of those who saw the correct action several months ago as letting at least one of the auto-makers go bankrupt without billions of dollars of subsidies.

We no longer have the market demand to support this industry at its current level, even if Chrysler starts producing "green" cars. In the long run I think those thousands of auto workers will be worse off under this deal.

That having been said, you make an excellent point that stakeholder capitalism is never tried in the US until the company is in extremis.

9:45 AM, May 08, 2009  
Blogger Tom Noyes said...

No apology necessary. Your post prompted me to think more about the subject.

What struck me was to read a libertarian argue in favor of "a case for more regulation to refine and support the law of contracts."

It has been argued that the ability to enter bankruptcy, modify contracts and emerge with some ability to seek further financing is one of the strengths of our legal system. In contrast, the old system of debtors prisons discouraged risk taking, which is considered a virtue (up to a point) in a capitalist system.

12:21 PM, May 08, 2009  
Blogger Steven H. Newton said...

An inherent tenet of Libertarianism is the sanctity of the law of contract. There are anarcho-capitalists who believe that the law of contract can be made to function satisfactorily in the complete absence of government. I am not one of them.

It's also important to distinguish between regulation, manipulation, control, and ownership when we are having these sorts of disccusions.

Consider railroads: government could regulate safety standards without having to own Amtrak; two different animals. Government could subsidize a passenger route in the Bos-Wash corridor without having to own Amtrak. And so on.

I think a lot of these distinctions are lost because, to cite one example: libertarians tend to try to smear progressives as socialists and progressives tend to conflate libertarians with anarcho-capitalists.

3:21 PM, May 08, 2009  

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